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The great hard-disk drive shortage seems to be nearing completion.

BlueFin Research analyst Paul Peterson asserts in a note this morning that the supply imbalance in hard drives that was triggered by last year's flooding in Thailand is not as dire as originally feared, which is good news for PC manufacturers that had been struggling to buy enough drives at reasonable cost. One contributing factor, he notes, is that PC demand remains sluggish. Seasonally slow demand is allowing a rapid recovery in HDD inventories, he asserts.

"Following on the heels of the flooding in Thailand, the prevailing feeling was that the lack of production of hard drives would lead to multiple quarters of seemingly unrelenting demand in an effort to meet supply shortfalls, replenish HDD inventory in OEM and distribution channels globally and serve the forecasted growth of the PC and consumer electronics markets for devices integrating HDDs," he writes. The analyst points out that in Q4, shipments fell below anticipated levels by 50-55 million units. For Q1, he adds, the shortfall will be in the 10-15 million unit range.

Peterson asserts that demand continues to outstrip supply, "but far less than originally forecasted." He says that in Q4, despite the shorfall in drives, PC unit shipments missed expectations by 5-7 million units. "The depletion of inventories globally continues to play a major role in the hard drive market, but the lack of momentum from the PC market is intriguing," he writes. "PC demand in Q1 2012 is lagging (consensus is down single digits from comparable Q1 2011 levels) and there is growing sentiment that PC demand in 2012 is far less robust than expectations both pre-flood and immediately post- flood. We believe current demand is still outstripping production capability, but at far lower levels than originally forecasted. This is leading industry players and observers to worry that the supply/demand imbalance could tip in the opposite direction."

The BlueFun analyst says he finds that some HDD suppliers have received orders that are much higher than reasonable production levels would warrant, "suggesting that orders have been inflated to ensure sufficient supply. These suppliers are now starting to get concerned about the stability of these orders, sensing a decreased sense of urgency from the HDD OEMs."

He adds that if the supply imbalance does correct faster than anticipated, component suppliers would be far more likely to feel the backlash than an outright glut of HDDs, due to the severe inventory depletion of drives at the outset of the crisis. But he adds that pricing trends could reverse if supply recovers sooner than anticipated - and that could ding financial results and share prices at Western Digital an Seagate if that happens.

"With the industry now sitting at three large diversified suppliers, the hope is that there will be less likelihood of aggressive price or production moves to upset the balance of supply/demand, and inevitably pricing," he writes. "But suppliers are being tasked with component orders which would be far in excess of reasonable demand forecasts, according to our research. Add to this the potential for overproduction from the integration of the WDC and Hitachi GST operations, with each company essentially acting as separate entities for a period of two years. And not only is PC demand waning, consumer electronic devices integrating HDDs are also depressed. Game console and DVR growth is being depressed by the economic malaise, as well as the improved gaming experience on smartphones and tablets, and the fact that these devices are lasting longer in homes than previous generations. Apple’s decision to stop integration of HDDs into Classic iPods was another blow to the CE space for HDDs."